Are You Calculating Your Prices Correctly?

Is there a better way to calculate fees? According to American Animal Hospital Association CEO Mike Cavanaugh, DVM, DABVP (Emeritus), pricing is a critical issue. “Developing a pricing strategy as a component of a practice’s strategic plan is an investment in future success,” he said at the Veterinary Hospital Managers Association (VHMA) Critical Issues Summit in Chicago this past summer. “Pricing is a great example of something we can’t keep doing the way we’ve always done it.” Regardless of how your practice has priced goods and services in the past, it is time to reassess your strategy. Your success relies on it.

Most practices determine pricing using a cost-based method in which price is determined by estimating costs and adding a predetermined markup percentage.¹ Although this is an easy method, it ignores some important factors.

The other strategy commonly used is the “mystery shopper” reconnaissance mission. This adds another layer to the pricing strategy by adjusting prices based on what competitors are doing. Again, this method is simple but flawed.

One of the biggest and most common hurdles to properly pricing veterinary products and services is discounts—the dental discount, the wellness bundle, the senior discount, the first-time client discount, and many more. The problem here is that most practices do not track whether these discounts help improve client loyalty or increase revenue.

WHY CHANGE?

When establishing prices for your practice, it is important to consider trends both within your own hospital and throughout the industry. For example, pet care expenditures, mostly in the pet food and veterinary care categories, have been increasing each year.² And although practice revenue and pet visits both have grown in recent years, the rate of that growth slowed between 2016 and 2018.² The increase in total pet industry expenditures was much higher in 2016 (10.7%) than in 2018 (3.7%).²

New clients have been on a steady decline over the same period of time, reaching an all-time low of —10.4% in May 2018.² The American Veterinary Medical Association also released data indicating a decline in total veterinary visits for both dogs and cats from 2011 to 2016.²

For veterinary practices, this underscores the need to develop a strategic plan for improving pricing structures. It’s not about raising prices or increasing markups to bolster profitability, nor is it about attracting more clients with lower prices. It is about being smart regarding the way prices are determined.1

ALTERNATIVE PRICING STRUCTURES

In his book, How to Price Effectively: A Guide for Managers and Entrepreneurs, Rice University marketing professor Utpal Dholakia, PhD, detailed the 4 pillars that constitute a value pricing framework. The first pillar, cost, sets your base price, or how much you need to charge to cover what it costs to provide the service or product.

The second pillar is reference prices—those mystery shopper and benchmark data that give your prac- tice insight into the range of prices that affect your pricing strategy. Reference prices come into play with your clients as well; they, too, are judging your prices compared with those of other local practices and online retailers.

The third pillar, customer value, represents the total amount your clients are willing to pay and sets the ceiling on what can be charged for a given product or service. Most practices do not take the time to deter- mine this value because it requires a survey-based method and the client’s value is not stable (it changes over time).

The fourth pillar is the value proposition. This represents the unique characteristics of your prac- tice relative to your competitors. It tells you which of the other 3 pillars should be weighted more in your pricing decisions and why clients should buy from your practice instead of elsewhere. Your team is one of those unique characteristics. Who is on your team, how they behave with patients and clients, and their level of knowledge make them unique to you. Another example is your cost structure: Do you offer the lowest prices or the best quality?

WHAT’S THE TAKE-HOME MESSAGE?

The key takeaway here is that your pricing structure should not involve a blanket strategy of doubling costs or adding a 3% markup. As Dr. Dholakia noted, it needs to be about knowing the floor to cover costs, investigating the ceiling to know what clients will pay, under- standing the range your competitors are charging, and promoting your uniqueness. It will become necessary to begin to move your pricing structure from a cost-based to a value-based model with a strategy for setting fees that are understood and respected by both your team and your clients.

REFERENCES

• Dholakia U. How to Price Effectively: A Guide for Managers and Entrepreneurs. Self-published, Amazon Digital Services; 2017.
• Felsted K. What’s going on in the profession? Presented at: VHMA Critical Issues Summit; August 8-9, 2018; Rosemont, IL.

Ms. Dunn is an award-winning speaker, writer, and consultant who brings over 40 years of in- the-trenches experience and business education to veterinary management. She is founder and CEO of Snowgoose Veterinary Management Consulting, which helps veterinarians develop strategic plans that con- sistently produce results.